Monday, June 07, 2004

Australia's housing market has weakened. According to official data, average house prices kept rising in the first quarter, leaving them 18% higher than a year before. However, figures collected by Australian Property Monitors, which are more timely because they are based on prices when contracts are signed rather than at settlement, suggest that home prices tumbled by an average of 8% in Sydney and by 13% in Melbourne in the first quarter. Anecdotal evidence suggests that the slide has continued since then. Last weekend in Sydney only one-third of properties put up for auction�the most common method of sale in Australia�were sold, signalling that prices have farther to fall.

The drop in house prices in Australian cities undermines a popular argument heard in Britain and America that even if house prices do look frothy, they are unlikely to fall unless there is a big rise in interest rates or a jump in unemployment. Neither has been needed in Australia. Interest rates have risen by only half a percentage point during the past year, to 5.25%�less than half the level during the previous housing downturn in 1990. Meanwhile, unemployment is close to a 20-year low. . . .

Among our 16 countries, prices are now at record levels in relation to average wages and rents in America, Australia, Britain, Ireland, the Netherlands, New Zealand and Spain. The ratios of prices to incomes exceed their averages in the past 30 years by between 25% and 60%. A return to the long-term average could be brought about either by a fall in house prices or by a rise in wages and rents. The snag is that with wages in most countries increasing by only 3-4% a year, it would take years for inflation to erode real house prices to normal levels.

The chart to the right [see here] shows by how much prices would need to fall to get back to their long-term average, assuming that the decline takes place over four years and that wages rise at a pace similar to that in the recent past. House prices would need to fall by 10% in America, by 15% in New Zealand and by 20-30% in the other five countries.

The same old suspects are here: Spain, Netherlands and the Anglosphere. The numbers for the US are especially deceptive because of the presence of multiple large distinct housing markets in the country. A national figure of 7.7% masks very low price growth in the Midwest and South as well as bubble-icious increases in the Northeast (up 18.7% y-o-y) and California. While The Economist shows just a 7.7% annual rise in housing prices nationally for the US in 2004:I, 35 US metropolitan housing markets had increases of over 10%, including eleven over 20%, concentrated in California (Orange County, Los Angeles, Sacramento, San Diego), Nevada (Las Vegas, Reno) and Florida (Bradenton, Ft. Myers, Miami, Sarasota).

Interestingly, Canada is the only Anglosphere country not partaking of the bubble, with housing prices over 1997-2004 up only 30%.